Dave builds bird houses at a negligible cost. He sells 5 percent more bird houses this year than last year. The market price this year is 2 percent lower than last year. Which inflation rate makes Dave as well off this year as last year?

Question

Quizplus · Accepted Answer

Dave sells 5% more bird houses at a price that is 2% lower, resulting in a revenue change of (1.05 * 0.98) - 1 = 1.029 - 1 = 0.029 or 2.9%. To maintain his well-being, inflation should match this revenue increase, hence 3% is the closest match.

Dave Builds Bird Houses at a Negligible Cost